I think your assumption about the tax increase is way off. The deduction is for the _interest_ paid on a mortgage. Let's assume you buy a $400,000 home with 20% down and a 30-year loan with a 4.5% interest rate. Because it's a deduction -- not a tax credit -- your savings in the first year is only about $6600, and that savings decreases every year after that as interest becomes a decreasing portion of each payment.

I don't think people are going to avoid homeownership in droves because of $6600 per year -- especially people who are in the financial position to own a home. It would, however, remove some of the perverse incentives that make people buy homes who might otherwise be happy to rent one.